If you are a parent, or responsible for another minor who is dependent on you, then you know that your basic duty is to provide for them both emotionally and financially. Still, there’s always life’s uncertainty that tomorrow is not guaranteed. What would happen if something happened to you, and then there was no one around to look after the children? How can you ensure that their needs are met?
Leaving life insurance for your child’s use after your death is always a good idea. However, it is very different to leave the benefits to a minor as opposed to an adult who is no longer a dependent. As a result, you’ll often have to take special steps, such as establishing a trust, to ensure the money goes to the correct place.
How Life Insurance Trusts Work
When buying life insurance, you must name a beneficiary. This is the person who receives the death benefit payment from your life insurance when you die. You won’t need it, after all.
If you just name the beneficiary, and attach no special conditions to your policy, then the beneficiary has the leeway to do with the money what they wish. As a result, you might be tempted to set a few rules on how the money is to be used. One of those ways is to establish a trust.
With a trust, you leave instructions on how survivors can use the insurance. That money effectively becomes earmarked. The trust will only allow the money to go towards the costs allowed. This is especially important when it comes to leaving money to minors. Legally, minors cannot be direct beneficiaries. However, by funneling the money into a trust, you can still ensure that there are rules in place to safeguard the money for the benefit of the children.
Setting Up The Trust
Upon choosing your life insurance benefits, speak to your insurance agent about the rules for setting up a trust for the money. They can inform you of the appropriate parties to help you establish the fund itself. Usually, this will involve working with your bank, and often your estate planner.
When establishing the trust, you will name a trustee. This might be a surviving spouse, the legal guardian of the children, or even a lawyer. You can then stipulate the rules under which the trustee can use the money. They are then legally bound to follow these rules of the trust when distributing the money. Additionally, you can often arrange for the trust to be turned over to the child themselves when they reach a certain age (though they must be at least 18 in this case).